Overview
MEDITE Cancer Diagnostics, Inc. (the “Company”, “it”, “we”, or “us”), formerly CytoCore, Inc
.
, is specialized in the development, manufacturing, and marketing of molecular biomarkers, premium medical devices and consumables for detection, risk assessment and diagnosis of cancer, precancerous conditions and related diseases. Depending upon the type of cancer, segments within the current target market of approximately $5.8 billion are growing at annual rates between 10 and 30%. To use the well-established brand of MEDITE and to have a better description of the company’s business, the Board approved the name change to “MEDITE Cancer Diagnostics, Inc.” As a result, the Company’s trading symbol was changed to “MDIT”.
The year 2015 was focused on several growth opportunities including late stage developments and market preparation of a newly developed and patent pending assays, several new laboratory devices and several marketing projects like the Chinese standardization projects for histology and cytology. The Company is optimistic about recent marketing efforts involving the larger laboratory chains. The Company acquired MEDITE, formally CytoCore, Inc. during 2014 which provided it with a well-developed infrastructure in the medical industry; 80 employees in three countries, a distribution network to approximately 70 countries worldwide, a well-known and established brand name and a wide range of products for anatomic pathology, histology and cytology laboratories is available for sale.
The Company successfully sold more internally developed and manufactured devices and more supply goods than in 2014. Without the USD-EURO exchange influence, it would have resulted in a 6.3% revenue increase. With the exchange rate influence, the overall revenues for the Company were $9.9 million in 2015 compared to $11.0 million for 2014, a reduction of $1.1 million or 9.97%.
After the successful market entrance into China in 2014, the Company increased its revenue in this market to approximately $1 million in 2015, compared to no sales and approximately $300,000 of orders in 2014, with anticipated sales in 2016 of approximately $2 million. The Chinese market is the fastest growing market, and by 2016 the Company expects it will be the largest market for its products. We anticipate significant orders could increase revenues in China based on a large order backlog for this region. By working with its Chinese distributor, UNIC Medical, the Company has successfully received China Food and Drug Administration (“CFDA”) approval for all MEDITE histology laboratory devices at the end of 2014, and for the Cytology device in 2015. The UNIC Medical sales team is selling MEDITE products in China with increasing volumes. Also, together with UNIC, we are part of a government supported project to standardize the histology laboratory process in China using MEDITE equipment and consumables for the processing, the newly develop assays, and the UNIC medical for digitalization and computer aided diagnostics utilizing the latest cloud technology.
MEDITE’s Breast Product is non-invasive, easy, gentle, highly sensitive and specific solution to enable young women between 20 and 45 years of age to obtain their individual breast cancer risk assessed. An automatic and gentle collection device for breast cells together with a newly developed and assay is used to determine a woman’s risk to develop breast cancer. Knowing the individual breast cancer risk will provide relief to a majority of young women who have no elevated risk of developing breast cancer. For those who have a higher risk, it enables them to monitor that risk closer for earlier treatment, if needed. The earlier a precancerous or cancerous situation is detected, the higher the chance to treat the finding and reduce the fatality rate for these conditions. The product development of BreastPap continued in 2015 reflecting feedback from doctors’ test use of prototype units’ and office feedback to continuously improve the product prior to launching the product. The Company expects to start marketing the BreastPap in 2016 targeting significant market demand for women under the age of 40 - 45 where in most situations mammography is not effective for breast cancer risk assessment. The Company’s BreastPap product is a risk assessment tool planned to detect “abnormal” cells contained in the women’s breast aspirant. Upon detection of abnormal cells, women, based upon their physicians’ advice may be candidates for further diagnostic testing.
The developed and patent pending self-collection device SoftKit is targeting the growing POC & POP (point of care or point of people care) market. Growth in this area is due to consumer driven health care requirements and the necessity to support and address incremental patient population needs for screening and on-going diagnostic tests. SoftKit serves as just such a product, addressing this market requirement. SoftKit is planned to be sold through various marketing channels that serve the consumer health and emerging post-acute care as the influence of clinical labs are expanded.
Under the Company’s cytology product line, the SureThin product revenue grew in Europe and U.S. (non-Gyn applications) during 2015. The Company is in the process of preparing an application to the U.S. Food and Drug Administration (“FDA”) for SureThin Gyn applications and once approved can compete with some of the dominant suppliers in this $600 million market.
The Company brought several other innovative products closer to marketability during 2015 as listed above. Also, in early 2015, the German priority patent for a fully automated system used in the histology lab, a “Lab-In-One” unit, was granted. This technology, if successfully accepted by the market, has the ability to change the competitive landscape within the industry.
The Company authorized and completed a reverse split of its common stock of 1:100 to support its present capital needs and future anticipated growth. This reverse split was effective March 12, 2015. As a result of the reverse split, the Company’s issued and outstanding common stock was reduced to 19,427,331 from 1,942,733,100.
Background
The Company was incorporated in Delaware in December 1998 as the successor to Bell National Corporation, a company incorporated in California in 1958. In December 1998, Bell National, which was then a shell corporation, acquired InPath, LLC, a development stage company engaged in the design and development of products used in screening for cervical and other types of cancer. For accounting purposes, the acquisition was treated as if InPath had acquired Bell National. However, Bell National continued as the legal entity and the registrant for Securities and Exchange Commission (“SEC”) filing purposes. Bell National merged into Ampersand Medical Corporation, its wholly-owned subsidiary, in May 1999, in order to change its state of incorporation to Delaware. In September 2001, we acquired 100% of the outstanding stock of AccuMed International, Inc., by means of a merger of AccuMed into our wholly-owned subsidiary. Shortly after the AccuMed merger, we changed our name to Molecular Diagnostics, Inc. Subsequently, in June 2006, we changed our name to CytoCore, Inc.
On January 11, 2014, MEDITE Cancer Diagnostics, Inc. (formerly CytoCore Inc. ., the “Company”) entered into a Stock Purchase Agreement (the “Purchase Agreement”) with MEDITE Enterprises, Inc., a Florida corporation (“MEDITE”), MEDITE GmbH, a corporation organized under the laws of Germany and wholly owned by MEDITE (the “Subsidiary”), Michael Ott and Michaela Ott, the sole shareholders of the MEDITE (collectively, the “Shareholders”).
Pursuant to the Purchase Agreement, the Company agreed to acquire 100% of the issued and outstanding capital stock of MEDITE from the Shareholders in exchange for the issuance of up to 15,000,000 shares of the Company’s common stock (the “Shares”) to the Shareholders. The Purchase Agreement also provides that the Shareholders will indemnify the Company for certain losses during the one year period following the “Closing” as defined in the Purchase Agreement. In connection with such indemnification rights, the Purchase Agreement provided that 3,750,000 of the Shares was deposited with the Company and held for a period of 12 months to cover certain indemnification claims that the Company may have against the Shareholders. These shares were released to the Shareholders during 2015.
Closing of the acquisition of MEDITE was conditioned upon: (i) the completion of a private placement transaction resulting in gross cash proceeds to the Company of $1.25 million (the “Private Placement”), and (ii) the conversion of certain accrued wages of the Company into shares of the Company’s common stock. In addition, as of the Closing, there shall be no more than 18,750,000 shares of the Company’s common stock exclusive of any shares of the Company’s common stock issued in connection with the Private Placement.
On April 3, 2014, pursuant to the terms and conditions of the Purchase Agreement, as amended to date, the Company acquired 100% of the issued and outstanding capital stock of MEDITE in exchange for the issuance of up to 15,000,000 shares of the Company’s common stock to the Shareholders, of which 14,687,500 shares were issued upon the Closing of the Acquisition. In the event that the Company issues less than $2,500,000 at a price $1.60 in the Private Placement, the Company was required to issue an additional 312,500 shares of common stock to the Shareholders. The Company issued these shares during 2015. Also during 2014, prior to the reverse merger, the Company issued 697,234 shares of common stock for payment of certain accrued wages of the Company.
Upon the Closing of the Acquisition on April 3, 2014, the Company conducted an initial closing of the Private Placement. Pursuant to the Securities Purchase Agreement executed in connection with the Private Placement, the Company issued 955,875 shares of common stock to accredited investors for an aggregate gross purchase price of $1,529,400. After closing of the acquisition on April 3, 2014, The Company continued receiving equity funds for $295,000 for the issuance of 184,375 common shares through October 28, 2014, subject to the terms of the private placement agreement which was in effect before and during the closing of the acquisition. To continue financing the business development of the Company, a subsequent private placement of unregistered common stock of up to $800,000 for a price of $1.60 per share for the period of November 1, 2014 until April 30, 2015 was offered to investors in exchange for 500,000 shares of common stock pursuant to Section 4(2) and Regulation D of the Securities Act of 1933 (the “Second Private Placement”). From January 1, 2015 to April 15, 2015, $540,000 was received by the Company in exchange for 337,500 shares pursuant to the Second Private Placement.
On September 26, 2014, the Company obtained the written consent of the holders of the majority of the issued and outstanding shares of its common stock to amended its Certificate of Incorporation to increase the number of shares of common stock that it is authorized to issue from 2,000,000,000 to 3,500,000,000 (Not adjusted for the reverse split discussed below). This was approved by the board of directors of the Company (the “Board”) pursuant to a Resolution dated October 9, 2014.
Recent Developments
For the year ended December 31, 2015, the Company issued 1,326,875 shares of unregistered common stock to qualified individuals pursuant to exemptions from registration under Regulation D and Section 4(2) of the Securities Act of 1933 at $1.60 for proceeds of $2,124,000, net of $70,000 of issuance costs. Further, the Company issued 12,100 shares of common stock in a Series D Preferred Stock conversion as further discussed in Note 8 in “Part II Item 8 Financial Statement – Notes to the Consolidated Financial Statements”. Included in the total shares issued during 2015 were 1,086,250 shares of common stock at $1.60 for proceeds of $1,739,400 to the President of UNIC Medical of China. UNIC is the Company’s distributor in China and other Asian countries. In addition, the Company issued Michaela Ott and Michael Ott the remaining shares of 156,250 each, total of 312,500 shares, to complete the 15,000,000 shares required in conjunction with the 2014 Purchase Agreement.
On December 21, 2015, the Company filed a Certificate of Amendment to its Certificate of Incorporation (the “Certificate of Incorporation”) to decrease the Company’s authorized common stock, par value $0.001 per share (the “Common Stock”), from 3,500,000,000 shares to 35,000,000 shares, (the “Amendment”) and keep the authorized shares of preferred stock, par value $0.001 per share (the “Preferred Stock”), unchanged.
On December 31, 2015, the Company entered into a Securities Purchase Agreement (the “2015 Purchase Agreement”) with seven (7) individual accredited investors (collectively the “Purchasers”), pursuant to which the Company agreed to issue to the Purchasers secured promissory notes in the aggregate principal amount of $500,000 with interest accruing at an annual rate of 15% (the “Note(s)”) and warrants to purchase up to an aggregate amount of 250,000 shares of the common stock, par value $0.001 per share, of the Company (the “Warrant(s)”). The Notes mature on the earlier of the third (3rd) month anniversary date following the Closing Date, as defined in the Note, or the third (3rd) business day following the Company’s receipt of funds exceeding one million dollars ($1,000,000) from an equity or debt financing, not including the financing contemplated under the 2015 Purchase Agreement. The Notes are secured by a security agreement (the “Security Agreement(s)”). The Warrants have an initial exercise price of $1.60 per share, which are subject to adjustment, and will be exercisable for a period of five (5) years. If the Notes are not redeemed by the Company, each Purchaser is entitled to receive 10% of the principal balance of the Notes outstanding in warrants for every month that the Notes are not redeemed. On March 15, 2016, the Board of Directors approved the renegotiated terms with the warrant holders to remove the anti-dilution feature in the warrant agreement for the increase of warrants received from 250,000 to 500,000 with a fixed exercise price of $0.80 from $1.60 per share.
Information about Industry Segments
The Company operates in one industry segment for cancer diagnostics instruments and consumables for histology and cytology laboratories.
|
Definition:
|
Histology - Cancer diagnostics based on the structures of cells in tissues
Cytology - Cancer diagnostics based on the structures of individual cells
|
Cancers and precancerous conditions are defined in terms of structural abnormalities in cells. For this reason cytology is widely used for the detection of such conditions while histology is typically used for the confirmation, identification and characterization of the cellular abnormalities detected by cytology. Other diagnostics methods such as marker-based assays provide additional information that can supplement, but which cannot replace cytology and histology. The trend towards more personalized treatment of cancer increases the need for cytology, histology and assays for identifying and testing the best treatment alternatives. We believe that this segment will therefore be increasingly important for future development of strategies to fight the “cancer epidemic” (World Health Organization: World Cancer Report 2014) which expects about a 50 % increase in cancer cases worldwide within the next 20 years.
This segment sees a trend toward, and demand for, higher automation for more throughput in bigger laboratories, process standardization, digitalization of cell and tissue slides and computer aided diagnostic systems, while also looking for cost effective solutions. In the US the Patient Protection and Affordable Care Act is a national example for the industry. More people have health insurance and therefore can afford early cancer screening, while at the same time the payers for health care continue looking for cost reductions.
MEDITE acts as a one-stop-shop for histology (also known as anatomic pathology) laboratories either as part of a hospital, as part of a chain of laboratories or individually. It is one out of only four companies offering all equipment and consumables for these laboratories worldwide. The MEDITE brand stands for innovative and high quality products – most equipment made in Germany – and competitive pricing.
For the cytology market, MEDITE offers a wide range of consumable products and equipment; in particular for liquid-based-cytology which is an important tool in cancer screening and detection in the field of cervical, bladder, breast, lung and other cancer types. It also developed an innovative new type of easy to use standardized staining solutions, and a very innovative and effective early cancer detection marker-based assays. These new developments are cost effective solutions able to replace more expensive competitive products, and therefore are also becoming the first choice for the growing demand in emerging countries.
All of the Company’s operations during the reporting period were conducted and managed within this segment, with management teams reporting directly to our Chief Officers. For information on revenues, profit or loss and total assets, among other financial data, attributable to our operations, see the consolidated financial statements included herein.
Description of Business
MEDITE develops, manufactures and sells a wide range of laboratory devices and consumable supplies for its target market in the histology and cytology cancer diagnostics segment. Therefore, most devices and some consumables are manufactured at its German facility. This facility also acts as central location managing all international sales and logistics outside of the Americas. A direct sales force is employed in Germany, Poland and the U.S., while about 70 more countries worldwide are covered with an existing and continuously expanding network of independent distributors. A general goal of MEDITE in sales is to act as a one- stop-shop for its customers. Instrument purchases are usually bigger investments, with prices often above the $50,000 level, which are more seasonal and depend significantly on investment budgets. Therefore, MEDITE also offers to sell the day to day consumables and sees its brand not just on the devices, but also on the supply products. The U.S. headquarters in Orlando, Florida manages the Company group and is developing, setting and realizing the strategic goals of the Company. It also acts as distributor for the Americas, maintaining a warehouse with instruments, repair parts and consumables available for sale and for warranty obligations to its customers, and taking care of centralized marketing, regulatory issues and finance. A second location in the U.S. operates as our research laboratory for cancer assays and other cytology developments, and is located in the Chicago area. In 2014, we established a new research and development facility in Poland, so that the Company can derive local cost comparative advantages (facilities and salaries) with good availability of engineers for electronics, software and product design at a lower cost level than in Germany or the U.S. to expand the Company’s development capabilities.
For sales, MEDITE is targeting three major areas; U.S., Europe and China. While the U.S. is currently the biggest potential market for MEDITE products, it is expected that China will surpass the U.S. market by 2016 due to much higher growth rates than Europe and the U.S. are currently experiencing, and the Company expects that trend to continue.
Currently, MEDITE’s principal customers are histology and cytology laboratories associated with hospitals or research institutions and independent laboratories in markets with direct sales and distributors in markets covered by them. In the U.S. market, MEDITE executed several distribution contracts with third party sales organizations additionally to its direct sales. It also successfully achieved and renewed contracts with three of the largest Hospital Group Purchasing Organizations: HealthTrust Purchasing Group, Brentwood, MA (“HealthTrust”), which oversees approximately 1,400 hospitals and 2,600 other sites, Premier, Charlotte, NC, which oversees 2,500 hospitals, and another 70,000 other healthcare sites and Mid-Atlantic Group Network of Shared Services (“Magnet”) with over 600 hospitals and approximately 4,000 other healthcare sites.
For manufacturing of its high quality devices at the German facility, an enterprise resource planning software is used to manage the material flow and production planning for about 6,000 different parts. Due to the wide range of products, the availability of all parts is essential to finish a manufactured product within an acceptable lead time. Smaller equipment items and all consumable products have to be available at any time to guarantee the customer continues work. Usually orders of these goods are sent within 24 hours after receiving the order, while for the bigger equipment, delivery times of 6 weeks are usually acceptable. Even due to different models of the same devices, the final assembling usually starts after the confirmed order.
The Company’s strategy is to use its pipeline of newly developed and currently under development of innovative devices, consumables and newly developed assays to set new standards in the industry, create new markets and to take over additional market shares from its competition.
Products
Histology
MEDITE offers its customers a comprehensive range of histology laboratory devices for processing tissue, from receiving the tissue in the laboratory to the final diagnosis. Most important to this segment are very high levels of reliability, efficiency, and safety.
Starting from receiving the biopsies, it may be necessary to decalcify them; for example from bone. The
USE33
is an ultrasonic decalcification instrument that automatically runs the process under controlled temperatures. Due to this innovative technology, it can increase the speed of decalcification by 300% compared to just using acid. Instead of days or even weeks, the biopsies are ready much earlier for further processing, which shortens the patient’s diagnosis wait time. This specific instrument also is often used in research labs.
The next step is the tissue processing (dehydration and fixation), which usually run automatically by the laboratory overnight with no human supervision. MEDITE’s instrument, the
TPC15
Duo or Trio, offers a very high capacity of 440 or 660 biopsies per run and also offers two or three independent protocols. Therefore, depending on the size and kind of tissue, it can process simultaneously the different steps, and therefore replacing two or three instruments of similar competitor’s instruments. It also offers a very high level of safety. In the unlikely situation of an error or just a power outage, it has a back-up battery, and the emergency mode puts the biopsies into a safe position. The price of the unit is very competitive in its market based on its high capacity.
After tissue processing, the tissue will be transferred into a paraffin block using an embedding center. MEDITE was the original inventor of the three piece units (heating, dispensing, and cooling). It is much more flexible to adapt to human and laboratory needs. While the dispensing unit usually is in the center, the others can be added to the right or left depending if right or left handed. Additional cooling units can also be added to extend the capacity. MEDITE offer two types: the low cost set
TES99
when budget matters, and the high end version
TES Valida
when design and technology is more important. The TES Valida is recognized as the best system currently available worldwide. Every histology lab has at least one system, but usually two or more of these embedding centers in place – historically the market consists of sales of several thousand units each year.
With the paraffin block from the embedding center, the biopsy needs to be sectioned using a microtome. Several types of automation are demanded by the market. On the low end a manual microtomes with no need for power, in the middle a semi-automatic version, and on the high end, a fully automatic microtome. While originally all microtome manufacturers were located in Europe (Germany or UK), today only MEDITE still manufactures its microtomes in Germany. For a microtome, the most critical functionality is extremely precise mechanics able to cut slices of 1 or 2 microns in thickness. Five years ago, MEDITE developed the semi-automatic version
M530
first, then the fully automatic version
A550
and started in 2014 the development of the manual version
M380
– mainly for the Chinese market – which the first production of these units were sold in August 2015 and this new product has shown heavy interest and increased demand from China and other emerging and developing countries. As part of tissue sectioning, the freezing microtome, called “cryostat”, is used for fast biopsies when a patient needs a diagnosis immediately e.g. still being in the operational theater. The prototypes of the
M630
were tested in the field and the serial manufacturing for this big instrument will be set up during the first half of 2016, and material for the first 75 units has been ordered during the first quarter of 2016. Based on the forecast of the Distributor, we expect to sell the 75 units within the first year. The Company’s strategic goal for the cryostat, is to offer a high quality device for a competitive price to win 20 to 30% of the market (1,500 to 2,500 units annually).
When the sections of the tissue are transferred to a microscopy slide they undergo a staining process with several different protocols depending on the type of tissue. To manage high volumes, robotic multi-staining systems are used. MEDITE offers the most flexible system,
TST44,
which is computer controlled and can run several staining protocols simultaneously, and its unique feature software can even overtake slower with faster protocols. The maximum capacity is about 400 slides per hour with that system. This robotic stainer is scheduled for updating and modernization in 2016. It will get the latest innovative technology software, new color touch screen, new X-Y moving technology and a modern newly designed case. For higher volume throughput, e.g. for cytology laboratories, MEDITE offers the
COT20
linear staining system using a kind of conveyor technology to realize a capacity of over 1,000 slides per hour. Also this high throughput staining equipment will undergo a revision in 2016 to increase its capacity by 50% to 1,500 slides per hour for the higher demand from larger laboratories.
Currently, the final step to the process is the stained microscope slide gets a cover over the tissue to preserve it for many years and make it ready for digital scanning or directly for diagnoses under the microscope by a pathologist. MEDITE therefore offers the
RCM9000
, the latest version of a stand-alone robotic coverslipper using glass coverslips. Another option MEDITE developed is the
ACS720
glass coverslipper which can be connected directly to the TST44 multi-stainer creating a higher level of automation by bridging the former manual step between two separate instruments. This instrument combination is very competitive and more and more public tenders are asking for it. Finally, to also support higher throughput laboratories, MEDITE developed the robotic coverslipper
TWISTER
using a clear film instead of cover glass. This triples the capacity of a glass coverslipper up to 1,200 slides per hour. The first production of 10 units of this new development are partially sold, and the remaining are to be used for customer demonstrations. The regular serial production is scheduled for the 2
nd
quarter of 2016.
Several smaller devices for stretching, drying, cooling, exhausting, recycling, printing etc. are also manufactured by MEDITE but not specifically described herein. These products are usually competing mainly on price, but quality is still important.
For 2016, MEDITE added to its product portfolio and its 2016 catalogs some equipment to support environmentally friendly laboratories, for example recycling machines for alcohol and xylene as well as a machine for formalin neutralization and dispensing. The Company added a slide printer in 2015 and will add a cassette printer for 2016, offering a further step to digitalization using barcode writing on microscope slides and embedding cassettes. Also stainless steel furniture like grossing stations – used in every anatomic pathology and histology lab - with the option of automatic height adjustment and a very competitive price is new in the 2016 catalogs.
In the segment of histology consumables, MEDITE offers everything necessary to run its instruments and to run the complete histology laboratory. This includes embedding cassettes, microscope slides, paraffin, staining solutions, reagents and other products. Some of the consumable products are MEDITE developments and exclusively manufactured by or for it. Others products are MEDITE branded, but manufactured and delivered from external high quality vendors. The procurement focus therefore is on high quality, not lowest price.
Cytology
The product strategy of MEDITE in this market is to offer products for the whole process, from cell collection over processing to diagnosis.
Some of the processing histology instruments of MEDITE are also used in cytology labs, like the staining and coverslipping systems. Characteristics of the sample collected determine the quality of the results of any tests performed on the sample. The sensitivity and/or accuracy of a test is, for example, likely to be reduced if the sample collection device or method does not capture a sufficient amount of the target analyte, alters the analyte of interest, or collects significant quantities of substances that interfere with the analysis. The Company’s major focus for product development is in the area of sample collection for specific cells and tissues.
For collecting the cervical cells the Company developed the
SoftPAP
device for the collection of cervical cell samples that are used in the detection of cervical dysplasia, cancer and human papillomavirus (“HPV”) infections. We believe that SoftPAP, which has been cleared by the Food and Drug Administration (‘FDA”) for sale in the U.S., which is CE Marked for international distribution, and is positioned as a premium value-added alternative to the spatula, broom and brush-style devices that have traditionally been used for these purposes. Unlike these traditional devices, SoftPAP collects only exfoliated cells and does not scrape, cut or abrade the cervix. This unique sample collection method has been shown in clinical trials to reduce the frequency of false negative and false positive results when the sample is evaluated by cytological methods to detect the presence of dysplasia and cancer. In addition, women have reported that having a cervical sample taken using
SoftPAP
is more comfortable than when a traditional device is used. This product was presented at European cytology meetings in 2015, and got some interest from the market.
SoftKit
is a low cost disposable device for the self-collection of a sample that can be evaluated to provide an assessment of the health of the entire female genital tract. The Company has applied for patent applications in multiple countries. The Company currently is going to finish the final design of SoftKit for the collection of cellular samples that can be screened for a variety of gynecological cancers (including cervical, endometrial, and ovarian), and for the collection of gynecological samples to be tested for the presence of HPV and variety of gynecological cancers and additional indications such as sexually transmitted disease (“STD”) testing. SoftKit addresses a number of market niches and segments that are not supported effectively by SoftPAP or traditional gynecological sampling devices. SoftKit is designed to eliminate the need for assistance from a medical professional when collecting gynecological samples for many screening applications. The Company believes that this feature, in addition to the range of tests that can be performed on a SoftKit sample and SoftKit’s low cost, makes it particularly attractive for use in large scale public health screening programs. We are also investigating the use of SoftKit in an internet-based, fee-for-service testing program outside of the U.S. A product manager was hired in the beginning of 2016 to manage its market introduction in the U.S. and worldwide for this innovative product.
Current methods for breast cancer screening primarily comprise manual palpitation of the breast and radiographic methods, including classical radiography and mammography. Regular manual self-examination is recommended for all women, and periodic breast cancer screening using radiography or mammography is recommended for all women over the age of 40 to 45. These methods, however, are widely recognized as not providing the sensitivity needed in order to detect small early stage lesions, and are adversely affected by the presence of high density breast tissue. The high error rates associated with the use of imaging modalities, such as mammography on women having dense breasts (dense breasts being common in women under the age of 40), has led to medical societies and health authorities recommending against the use of these imaging methods when screening a woman under the age of 40 for breast cancer. Since the early 1990’s, it has been known that nipple aspirate fluid (NAF) can be used as a sample in the assessment of a woman’s risk of developing breast cancer, and that this method is applicable to the screening of women who have dense breasts. In our opinion, currently available collection devices for that application offered by the competition lack either usability or market orientation and are much too expensive. Based on the researched market needs the Company started the development of the breast cancer risk assessment device
BreastPap
. After the acquisition of MEDITE, their engineering team advanced the project and are close to completing the prototype. The goal is to sell to cytology labs physicians and clinics which then can be forwarded to their gynecologist clients. The gynecologist offices then will offer this test to its female patients in the age of 20 and up. . MEDITE will therefore offer the collection device, the consumable set (including hygienic barrier) and also the necessary cancer assay. . The new developed device is expected to be ready in the third quarter of 2016 for market introduction, starting in Europe. Several cytology laboratories as well as gynecologists have already showed interest in this new product and expect a very good business with it.
Cervical cytology specimens are traditionally prepared as “smears” where the cells on the collecting device are literally wiped or smeared onto a microscope slide. In the mid-1990s, an alternative method, variously called a “monolayer” or “liquid-based” preparation (“LBP”), was introduced. In this method, cells are washed off of the collection device into a preservative solution to form a cell suspension. A portion of this cell suspension is then transferred to a microscope slide. LBPs presently account for about 80% of the cervical cytology slides prepared in the U.S., but despite the technical benefits of LBPs, only about 20% of the cervical cytology slides in the European Union and much lower percentages in the rest of the world are prepared in this manner. The primary limitations to greater adoption of LBPs outside of the U.S. are the high equipment and ancillary supply costs associated with the two predominant LBP methods. With the acquisition of MEDITE, the Company sells two alternative LBP methods product lines, the
SureThin
line which is competing against the market leader Hologic, and the
SafePrep
line which is competing against the second largest market player Becton-Dickinson. Both product lines cover the complete set of consumables necessary to preserve, extract and process cells onto a microscopic slide. For the SureThin line, MEDITE also offers a processing device automatically extracting the cells from the preservative vial and transferring it on the slide. Both systems have a significantly lower price than the competition, which is increasingly important for some markets like the US, where a cytology laboratory needs to lower its cost due to lower reimbursement rates. This lower price level itself also creates new markets, where it is now more affordable even to smaller laboratories and can better compete against the traditional Pap smear.
Once a cytology specimen has been deposited onto a microscope slide, it is stained in order to assist the cytologist in detecting and identifying the various features of the deposited cells that are relevant to determining whether the cells are normal, dysplastic or cancerous. The Company is developing several proprietary stains for use in cervical cytology and other screening applications. These stains are designed for first evaluation using our automated slide imaging and analysis system, but some may also be evaluated visually or using a flow cytometer.
Very important, as mentioned above, we are developing a family of immunocytological newly developed assays that combine the measurement of bio molecular cancer markers and cell morphology in a single test. These assays are intended to detect the presence of specific proteins and other markers that are indicative of the presence of a target disease; allow characterization of abnormal cells; or provide an estimate of the risk of disease progression. These assays are specifically designed to be compatible with each other and with our proprietary stains, and may be evaluated using our automated slide imaging and analysis system. An added benefit of our proprietary stains is that after the specimen has been evaluated using these stains, it can be counterstained with Pap stain for conventional confirmation and archiving. Internal laboratory test are showing a very high level of specificity and sensitivity, and the Company currently is preparing a strategy for the clinical evaluation. A system like this has the ability to displace the current expensive HPV testing methods by offering a significantly higher specificity and sensitivity, which management believes offers a significant market opportunity.
When “reading” the cytology specimen, a cytologist traditionally examines the specimen by eye through a conventional optical microscope to detect, classify, record, mark, and report abnormal cells. While performing this examination, the cytologist is also referring to the patient’s medical history, assessing specimen adequacy, and capturing a variety of metrics and other information needed for regulatory compliance and operational purposes. Despite the widespread deployment of computers in the laboratory, many of these operations are still largely paper-based. Even in laboratories where medical histories are available to the cytologists in electronic form and reports are prepared on a computer, it is not uncommon for the data, and sometimes even draft reports, to be initially captured on paper and then transcribed.
Over the last few years, the MEDITE developed software for an imaging system for computer aided diagnosis of slides including its new stain SURECYTE and its revolutionary new biomarker SURECYTE+. The intent of a medical screening system like this is to differentiate between patients who show no evidence of the target disease state (“normals”) and those who do (“abnormals”). Patients who have abnormal screening results are offered follow-up testing to confirm, diagnosis, classify and determine the extent of disease and, where appropriate, determine the appropriate treatment. Patients who have a normal screening result are not offered these services. In order to allow scarce medical resources to be focused upon those patients having the greatest need, screening programs are structured to differentiate between normal and abnormal patients as accurately, rapidly, reliably and cost effectively as possible.
The Company also is looking at new ways to analyze the SURECYTE data, for example ploidy analysis (popular in China) and micronuclei counting. These have both been touted as alternatives to regular PAP analysis.
The new Software and SURECYTE stain will also work in Non-GYN applications (e.g. lung, bladder, thyroid and other cancers) and being used for Non-GYN imaging together with the SURETHIN consumables and processing units.
This new software will provide a computer aided evaluation on all Non-GYN slides. Currently we are not aware of any other systems available anywhere in the world that can work together with the Company’s new combined biomarker SURECYTE+ which gives a complete description of the immune microenvironment. .
Ploidy analysis is very doable by determining the endocervical cell content of the sample. Ploidy analysis will be a significant and a product differentiator for our SURECYTE cervical test and will be a component of many of the SURECYTE+ -based assays that the Company will be using for other cytology’s products. The major reason why ploidy is not more widely used is that it is difficult and time consuming to get accurate (or even reproducible) results if any of the conventional cytology stains are used. SURECYTE eliminates these stain-related problems with the net result that using SURECYTE for morphology will also give us a ploidy result at the same time and for “free”.
Although the evaluation of cervical cytology specimens by automated image analysis can be traced back to the 1940s and a number of capable systems have been developed, the FDA has not to date approved any automated image analysis system to “diagnose”, or classify as normal or abnormal, cervical cytology specimens without human intervention. The FDA has, however, approved several systems including the AccuMed (a corporate predecessor to CytoCore) TracCell™ for use in “mapping” or “location-guided screening”. In these systems, image analysis is used to identify potentially abnormal cells which are then presented to a cytologist for classification. This approach, which has been shown to reduce the time required to differentiate between normal and abnormal specimens, has been increasingly adopted by high volume laboratories, but is presently too expensive for most laboratories. The Company believe that its imager will be marketable at a price that will be affordable for most laboratories.
Adding the software to a laboratory workflow could add efficiency to the process and this could be a significant value added selling point and product differentiator for its cytology tests. In almost all markets the Bethesda and other standards use endocervicals as an indicator that an “adequate” sample has been obtained. To date, none of the automated image analysis systems that we are aware of are capable of identifying endocervicals in a cervical cytology sample unless the sample has been immunostained for a specific cytokeratin marker on top of the morphological stain. This means that even if a slide has been evaluated using an imager system; a tech has to look at the slide visually to see if endocervicals are present. This is particularly true for normal slides where there is a concern that an abnormal was missed because the slide was inadequate. Our Software will be designed to the point where it can reliably identify endocervicals morphologically which would allow the Company to deliver an automatic adequate/inadequate call along with the morphology results thus reducing the need for a tech to visually look for these cells.
The Imager will be optimized for use with the described proprietary stains and assays. As these stains and assays are designed to be more effective in highlighting the cellular abnormalities associated with cancer and precancerous conditions than the traditional Pap and Thionin stains used in conjunction with other automated cytology screening instruments, our imager is expected to deliver superior performance when used in cytological screening applications. Since 2014, with the increasingly deepening relationship to the Chinese distribution partner UNIC Medical, who is specialized and has developed digitalization systems for slides, the Company began to merge both technologies together to shorten the time to market for this development.
Product Development and Research
With the acquisition of MEDITE and the startup of its Polish R&D facility in 2014, the Company employs 15 people for software, electrical and mechanical design engineers. The strategic goal is to optimize development processes to shorten the development period and time to market for several ongoing and new R&D projects.
MEDITE’s product development department is including engineering skills and technology in software development, multilayer circuit board design, electrical design, 3-D product design in (using the highly professional CREO design software), technical regulatory documentation, often individually for different countries worldwide, and quality management based on its ISO certificate.
The main focus of the developing team in 2015 was working on innovative and new products like the cryostat M630, the manual microtome M380, the film coverslipper TWISTER, a cytology processor, the BreastPap and several updates and modernization projects for existing instruments.
In addition, a team of experienced researchers in biochemistry, with successful track records and a very high reputation in that segment, are working on detection s of pre-cancerous and cancerous conditions in cytology and histology.
Markets and Marketing Objectives
As described also in other paragraphs of this report, our target is basically the worldwide cancer diagnostics market. Currently we serve in particular the histology and cytology segments of this total market but we are open to entering other cancer diagnostics segments in the future when attractive economically. The total annual market volume of histology and cytology is approximately $5.8 billion with annual growth rates between 10 and 30% depending on the specific market, cancer segment and country.
Cancer is a major threat for mankind and the recently published “World Cancer Report 2014” by the World Health Organization, states that the number of cases will increase world-wide by about 57% to 22 million cases in the next two decades. At the same time cancer deaths will rise from 8.2 million to 13 million per year.
MEDITE’s current and future products will assist in the
detection
of precancerous and cancerous conditions, and provide the basis for more efficient and cost effective
detection
The net effect of utilizing MEDITE’s anatomic pathology (tissue based) and cytology (cell based) products may result in more lives saved at lower costs.
While distributing currently into approximately 70+ countries of the world, the Company’s sales and marketing efforts are in particular focused on the three major markets of U.S., China and Europe.
Currently the target groups are the histology and cytology laboratories as end users. In some countries it sell directly to these laboratories, while in other countries it sell indirectly to them through its international network of distributors. Several of the products currently developing by the Company may also be sold to national health programs and/or non-governmental public health agencies, or possibly directly to consumers. The Company use several means like sales and technical training, advertising materials, special offers etc. to motivate its distributors selling MEDITE products. Depending on local markets, the contact to public health care organizations or other public authorities responsible for purchasing medical product is important. While in many markets the laboratories directly can decide about purchases, in others they have to undergo a tender process.
Worldwide, approximately 180 million Pap and 60 million breast cancer screening tests are performed annually. The potential market is approximately 1.5 to 1.8 billion women for each of these tests. Bio-molecular screening, diagnostic, and treatment products consequently are being developed to detect disease states early so they can be dealt with before they become life threatening and expensive to treat. The Company is designing and developing products to satisfy this paradigm shift and focus more on diagnostic methods and tools for early detection.
With the new products currently in the late stages of their development, like the BreastPap or the SoftKit, the Company is targeting different groups of end-users and establishing the logistics needed to reach and support these users. The BreastPap needs more public relations to inform women about the potential of having an easy and cost effective breast cancer risk assessment. Similarly, in addition to marketing to laboratories, the SoftKit is expected to be marketed to public health agencies as well as being directly marketed to the patient to motivate them buying it on the internet, a pharmacy or similar store. MEDITE will continue to adjust its marketing to the -specific need of each product group.
For the cytology and histology laboratories, the Company distributes national or international product catalogs each year with a wide overview of the related product lines. These are available in English, German and Polish languages and offered as export catalogs to its international distributors who translate them into the appropriate local languages. The catalogs are sent directly to the laboratories where MEDITE is selling directly.
The Company also uses advertisings in segment-specific journals like the “The Journal of Histotechnology” in the U.S. or “Der Pathologe” or “Cyto-Info” in Germany to both offer specific products and to increase the overall brand recognition. Its international distributors usually do the same in their specific country.
MEDITE is also attending several local, national and international exhibition and congresses which are segment specific or medical product orientated like the NSH in the U.S., the ECP in Europe, the Arab Health exhibition in Dubai, the Medica exhibition in Germany and many more.
Sales and Distribution
The Company is distributing its products to over 70 countries worldwide while focusing on the three major areas of U.S., Europe and China.
Depending on their experience, strength in their local market and potential sales volume, MEDITE uses exclusive or non-exclusive distribution national contracts. Due to the fact that the three major competitors, Leica, Thermo and Sakura, are changing their distribution strategy more towards direct sales, several well established independent distributors contacted the Company to sell MEDITE products in the future.
In the U.S., as it is currently the potentially biggest market, sales and distribution is more diversified. MEDITE has managed to become an approved vendor for three of the largest hospital group purchasing groups, Premier, HealthTrust and Magnet, with a total of over 5,000 member hospitals and health care providers. The contracts with Premier, HealthTrust and Magnet were successfully renewed in 2015. About 98 % of health care providers are members of one or more group purchasing companies, and therefore it is very important in the US to be a registered vendor to realize sales with their members. Being a registered vendor means usually being just one out of two or three vendors in that segment for the member hospitals, and also being released from individual purchase contracts with each customer in using the general term of the hospital group purchasing organization. While until now the Company has not realized the full potential of this distribution channel, it is working to gain its share of this market. A second distribution channel in the U.S. is selling MEDITE products through other established sales organizations, utilizing their sales agreements with end users and through their sales representative network. This network is increasingly an important part of MEDITE’s sales growth. The third distribution channel is direct sales using employed product specialist e.g. in cytology or even using our service employees for technical assistance, training, installation and sales. The channel of directs sales will be increased in the future using the Company’s own employees or sales representatives.
In Europe, the Company is selling direct in Germany and Poland with employed regional sales representatives and through a network of independent distributors in all other countries. Some of its sales partners are working with MEDITE for more than a decade. Also MEDITE is scheduling several dates for sales training of distributors and technical training for their technical service employees for free each year to keep a high level of experienced staff knowing MEDITE products worldwide, and also to collect feedback for product improvement and development.
For the Chinese market, MEDITE is using a strategic distribution agreement with its local partner UNIC Medical. The major shareholder and president is a professor of pathology and has established a wide network of sales teams in China and other Asian countries. With their help, the brand name MEDITE has attained recognition second in its segment. MEDITE together with UNIC successfully got Chinese FDA approval for all MEDITE histology instruments in 2014 and for the cytology instrument late in 2015. Since then the UNIC team has been increasingly successful is selling MEDITE products in China with anticipated sales of about $1 million for 2016. The shared goal in China is to become the market leader in the histology and cytology market.
The rest of the world is supported by an experienced team of export professionals at the German facility also acting as the Company’s logistic center. Especially in the medical area, a deep knowledge of custom tariffs and rules, international regulatory restrictions, international payment terms and dangerous goods shipment regulations, are major skills needed by these employees. MEDITE is approved and authorized by the AEO to manage several customs issues directly.
Government Regulation, Clinical Studies and Regulatory Strategy
The development, manufacture, sale, and distribution of medical devices are subject to extensive governmental regulation worldwide. In the U.S., our products are regulated under the Medical Device Amendments to the Food, Drug and Cosmetic Act (the “FD&C Act”) and cannot be sold, shipped or promoted in interstate commerce without prior “clearance” or “approval” by the FDA. In the European Union (“EU”), medical devices are regulated under the Medical Device, In-Vitro Device and other Directives that require that each product be CE Marked to show that it conforms to all of the requirements of the applicable Directive(s) before it can be imported into or sold in the EU. MEDITE products which are selling in the U.S. are FDA registered and all have the CE mark.
The regulatory systems in other major markets such as China and South America continue to undergo substantial changes and now in many respects resemble the system in the EU. In particular, the CE Mark is now accepted or required in essentially all significant markets other than the U.S. In addition to having to obtain the appropriate regulatory approvals, we are also required to register our products with the National Health Authority in many countries in which we expect to do business; may have our quality and manufacturing systems inspected and/or audited by representatives of various National Authorities; and may have to conform to additional regulations imposed by individual countries.
Under these regulations, we are subject to certain registration, record-keeping and reporting requirements. Our manufacturing facilities and those of our strategic partners, may be obligated to conform to specified quality standards, and are subject to audits and inspections. We are also subject to national, state and local laws relating to such matters as safe working conditions, manufacturing practices and environmental protection. Failure to comply with these regulations could have a material adverse effect on our future operations and may impose additional costs and risks.
In the U.S., the FD&C Act generally bars selling, advertising, promoting, or other marketing of medical devices that have not been authorized (approved or cleared) by the FDA. The promotion or sale of medical devices for non-approved or “off-label” uses is prohibited. The FDA also regulates the design and manufacture of medical devices. These regulations have been largely, but not completely, harmonized with the ISO quality system standards for medical devices that are used for similar purposes in most other countries. This incomplete harmonization requires us to maintain two separate, but equal quality systems and increases the cost and complexity of regulatory compliance. The FDA and the corresponding regulatory agencies in other countries may withdraw product clearances or approvals for failure to comply with these regulatory standards and may impose additional sanctions.
In the U.S. most low to moderate risk medical devices that have legally marketed predicates receive “clearance” to market through a process described in Section 510(k) of the FD&C Act. In order to receive clearance under the 510(k) process, a product must be shown to be “substantially equivalent” to an appropriate legally marketed “predicate device”. High risk devices and devices that do not have a predicate require “approval” via a Pre-Market Approval (“PMA”) submission in which de-novo demonstration of the safety and efficacy must be established. Changes to a product, its intended use, and/or its labeling often require the submission of another 510(k) or PMA application. Obtaining approval to market via the PMA process takes substantially longer and is far more expensive than obtaining clearance to market via the 510(k) notification process.
The e
2
Collector, which is the predecessor to the
SoftPAP
collector, was cleared for marketing by the FDA on May 31, 2002, and the SoftPAP collector received FDA clearance on January 31, 2008. Although most future Company products are expected to qualify for premarket clearance via the 510(k) process, some future products may require PMA approval.
In 2010, the FDA began a major review of the 510(k) process, which has to date resulted in the announcement of a number of changes including some that will directly impact our future products. Additional changes, some of which have the potential to substantially increase the time and cost involved in obtaining marketing clearance via the 510(k) process, are under consideration.
In the U.S., we are subject to various federal and state laws pertaining to healthcare fraud and abuse, including federal and state anti-kickback laws and the federal Foreign Corrupt Practices Act, which make it illegal for an entity to solicit, offer, receive or pay remuneration or anything of value in exchange for, or to induce, the referral of business or the purchasing, leasing or ordering of any item or service paid for by Medicare, Medicaid or certain other federal healthcare programs. These statutes have been broadly defined to prohibit a wide array of practices, and our activities may subject us and our partners to scrutiny under such laws. Violations may be punishable by criminal and/or civil sanctions, including fines, as well as the exclusion from participation in government-funded healthcare programs. Laws pertaining to these and related matters also exist in other countries.
Each country has historically imposed its own unique regulations on medical products. In recent years, however, there has been a trend toward the harmonization of these regulations resulting in greater consistency between countries. This has resulted in a large and growing number of countries (over 70 as of this writing) adopting the CE Mark as a central element of their regulatory process for medical devices. The U.S. is the only major country that has not adopted the CE Mark. In order for a product to be CE Marked, the manufacturer must demonstrate to the satisfaction of the regulatory authorities that the product is safe and effective (conforms to the “Essential Requirements” for that class of product) and that it is manufactured in accordance with specified quality standards. In most countries the CE Mark is a pre-condition for medical device registration and in some places such as the EU, is mandatory in order for a product to be imported into or sold within the country or region. Failure to comply with the regulations pertaining to CE Marking can result in product seizures and other sanctions.
Although Company registration to the ISO 13485 quality system standard is not required for companies selling Class I (lowest risk category) medical devices and products in the EU, such registration is for all practical purposes mandatory for companies selling products in Class II and higher. All products that are presently being sold and a significant portion of those that are in development are currently classified as Class I devices. However, some of our upcoming products are expected to be in Class II or Class IIa and some changes that are being discussed in the EU may, if they come to pass, result in the reclassification of some of our Class I products into Class II. Our quality system is presently registered to ISO 9001 which is the parent standard of ISO 13485. We presently expect that our quality system will be registered to ISO 13485 during 2016.
The CE Mark for a product must be renewed every five years and will generally also require renewal if the requirements imposed by these Directives and standards change. This renewal increases the cost of regulatory compliance. In addition, the specific quality system requirements imposed upon a product are determined by the risk category into which the product is assigned by the applicable Directives. All of our current and planned products are presently considered to be low risk devices and are assigned to Class I which imposes the lowest level of quality system requirements. If a new Company product falls within or a current product is reclassified into a higher risk category, we will incur higher regulatory costs in order to maintain the CE Mark on the affected product(s).
The EU is in the process of determining whether the various Directives pertaining to medical devices should be “recast” to bring them into conformance with the recommendations of the Global Harmonization Taskforce (GHTF) and is also studying the possibility of replacing these Directives, which must be transposed into national laws by each country in order to become effective, with EU-wide laws that do not require transposition. Conversion from the present Directives to corresponding EU laws could be beneficial in that it is expected to eliminate country-specific differences in how the Directives are applied and enforced and therefore facilitate our compliance with the pertinent regulations in the EU. Harmonization of the current medical device classification system with that recommended by the GHTF may, however, result in some or all of our products being placed in more restrictive categories that could significantly increase our regulatory compliance costs and time to market.
The GHTF, which is comprised of representatives from major medical device regulatory agencies such as the FDA, has developed a single unified medical device identification system that will be mandatory as it is implemented worldwide. These regulations went into effect in many countries during 2014, and will be going into effect in additional countries by the end of 2016. The Company is well positioned to comply with these new regulations as we have both the company and product specific codes mandated under this regulation for our current products and have the mechanisms in place to obtain such codes and the registrations of the affected products, if needed, in the future. In a number of countries these regulations include user fees that will increase our cost of regulatory compliance.
We are also required to comply with certain environmental regulations with respect to products that are sold in various countries. One of these regulations is the Directive on Packaging and Packaging Wastes in the EU that: mandates the minimization of packaging; restricts the use of certain packaging materials; and imposes requirements, including possible “take-back” provisions, with respect to the recycling of packaging materials. All of our current products comply with the requirements of this Directive. At present, we comply with the recycling portions of this Directive by ensuring that all packaging materials are compatible with recycling programs that are in place in the EU. However, in the future we may be required to take a more active role in the recycling of certain types of products including possibly “taking back” and recycling laboratory instruments. Implementing a compliant take-back program will increase our operating and regulatory compliance costs.
In the EU electronic products, including clinical laboratory instruments are required to comply with two environmental Directives, one of which requires that the manufacturer “take back” and recycle the electronic portions of these instruments and the other (the so-called RoHS Directive) of which restricts the presence of certain materials in electronic products. The Company complies with the RoHS Directive by requiring its suppliers to use only RoHS complaint materials in the construction of its products.
The “REACH” regulation, which requires the registration of all chemical products produced in or imported into the EU is presently in its implementation phase. The long term impact of this extremely complex multi-level regulation on the Company is unknown at present, but is anticipated to be minimal in the near term as our sales of chemical products (stains, preservative, etc.) are and are expected to continue to be at less than the threshold levels for registration and reporting. An increase in sales of such products above currently forecast levels and/or a reduction in the applicable thresholds could potentially result in additional costs to the Company.
Data from clinical trials and studies is often required in regulatory submissions and is highly desirable for use in product marketing activities. In general, at least one trial or study is necessary for each new product and additional studies or trials are needed to support new or modified indications for use and new marketing claims.
Cost and Reimbursement
In the U.S., laboratory customers bill most insurers (including Medicare) for screening and diagnostic tests such as the Pap test. Insurers, such a private healthcare insurance or managed care payers, in addition to Medicare, reimburse for the testing, with a majority of these insurers using the annually-set Medicare reimbursement amounts as a benchmark in setting their reimbursement policies and rates. Other private payers do not follow the Medicare rates and may reimburse for only a portion of the testing or not at all. In addition, certain provisions of the Affordable Care Act are expected to significantly affect the reimbursements for many tests and diagnostic procedures. These changes are expected to be introduced over the next years. Certain of the changes that have been proposed under the Affordable Care Act (ACA) would require that the cost effectiveness of novel new products be demonstrated in actual clinical use before Centers for Medicare and Medical Services (“CMS”), the agency that manages Medicare and Medicaid is allowed to provide reimbursement for such products. Historically, however, the medical community has generally been reluctant to adopt, or in some cases even to evaluate, novel products unless reimbursement is available. If these proposed ACA rules go into effect in their present form, it is anticipated that the cost and time required to introduce a novel product into the US market will be substantially increased.
Outside of the U.S., healthcare providers and/or facilities are generally reimbursed through numerous payment systems designed by governmental agencies, such as the National Health Service in the United Kingdom, the Servicio Sanitaris Nazionale in Italy and the Spanish National Health System, as well as private insurance companies and managed care programs. The manner and level of reimbursement will depend on the procedures performed, the final diagnosis, the devices and/or drugs utilized, or any combination of these factors, with coverage and payment levels determined at the payer’s discretion.
Our ability to successfully commercialize the current and future products will depend, in part, on the extent to which coverage and reimbursement for such products will be available from third-party payers in the U.S. such as Medicare, Medicaid, health maintenance organizations and health insurers, and other public and private payers in foreign jurisdictions. The coverage policies and reimbursement levels of these third-party payers may impact the decisions of healthcare providers and facilities regarding which medical products they purchase and the prices they are willing to pay for those products. In some countries, our ability to commercialize products will also depend upon us becoming a qualified bidder on the tender offers issued by the National Healthcare Authority. When we succeed in bringing products to the market, we cannot be assured that third-party payers will pay for such products or establish and maintain price levels sufficient for realization of an appropriate return on our investment in product development. Additionally, we expect many payers to continue to explore cost-containment strategies (e.g., competitive bidding for clinical laboratory services within the Medicare program, so-called “pay-for-performance” programs implemented by various public and private payers, etc.) that could potentially impact coverage and/or payment levels for current or future MEDITE products.
Competition
Historically, competition in the healthcare industry has been characterized by the search for technological innovations and efforts to market such innovations. Technological advances have accelerated the pace of change in recent years. The cost of healthcare delivery has always been a significant factor in markets outside of the U.S. In recent years, the U.S. market has also become much more cost conscious. The Company believes technological innovations incorporated into certain of its products offer cost-effective benefits that address this particular market opportunity.
MEDITE is currently focused upon histology and cytology which are the two major fields of the anatomic pathology market. Each of these segments is dominated by only 2 – 3 major players. In histology the Company’s manufactured instrument line competes with those from Leica, Sakura and Thermo Fisher while in cytology its current SureThin and SafePrep product lines compete with products from the Cytyc division of Hologic and the TriPath division of Becton-Dickinson. Unlike certain of these competitors, MEDITE is a global one-stop supplier for all histology and cytology laboratories.
In histology, the Company’s recently patented fully automated system “Histo-Revolution” will become the only system worldwide which can provide a fully automated lab-in-one solution in histology. Due to the Company’s patent protection for this technology, it is protected from replication until 2032 and no other company can duplicate this.
In cytology, the Company is currently developing a versatile fully-automated, objective analysis, screening and evaluation system for cancer screening that can be used with its current liquid based cytology SureThin line and the former CytoCore developed SureCyte stain, which is highly reproducible and produces staining results within seconds. This same system can be used with the Company’s newly developed Biomarker SureCyte+ newly developed assays and, unlike the few competing systems, it is specifically designed to perform cytological screening for a broad range of cancers when equipped with the appropriate software and reagent modules.
In general, the Company believes that its products compete primarily on the basis of clinical performance, accuracy, functionality, reliability, quality, product features and effectiveness in standard medical applications while being sufficiently versatile to support future applications. It also believes that cost control and cost effectiveness are additional key factors in achieving and maintaining a competitive advantage. It focuses a significant amount of its product development efforts on producing systems and tests that will not add to overall healthcare cost.
Operations
The Company’s operations consist of sales and marketing, research and development (including information technology), technical service, accounting and administration and manufacturing. Its quality assurance manager is independent and authorized to act at his own discretion in the interest of patient safety.
MEDITE instruments and certain other products are manufactured in the Company’s factory in Burgdorf, Germany. Product manufacturing is monitored by TUV Sud for the UL (“Underwriter Laboratories”, US electrical standard testing) while its quality system is periodically audited by DQS. Small lot manufacturing with Kanban flow control and ERP management is used to ensure the timely delivery of smaller instruments while minimizing finished goods inventories. Larger instruments, most of which are customized to meet the unique requirements of their purchasers, are manufactured to order with a short turnaround. Extra safety stock is maintained for the few single source items that are used in its products, while qualified second sources are maintained for all other critical items. All incoming purchased goods intended for resale, whether or not under the MEDITE brand name, or for use in the manufacture of MEDITE products, are subject to intensive incoming inspection, and all finished MEDITE manufactured products receive intense final quality control testing including 24-48 hour burn-in, as appropriate, to the specific product before shipment. MEDITE additionally audits and monitors the quality systems of third party suppliers of MEDITE-branded consumables and supplies.
The sales and distribution department is organized into the two major departments of direct sales and export (distributors). For direct sales the goal for consumables and smaller instruments is to ship them within 24 hours after the receipt of the order. The export department is handling quotes, orders and shipments to almost every country worldwide. Every query should be answered within 24 hours. After receiving an order for larger equipment the manufacturing department informs the export department of the expected shipping date.
The MEDITE enterprise resource planning system is an integrated software that handles sales, material management and production planning. It is also automatically connected to the accounting system, transferring customer and supplier invoices, payments and the material consumption as a just in time controlling tool.
Intellectual Property
The Company relies on a combination of patents, licenses, trade names, trademarks, know-how, proprietary technology, trade secrets and policies and procedures to protect our intellectual property. It considers such security and protection a very important aspect of the successful development and marketing of its products in the U.S., Germany, China and other foreign markets.
Patents, trademarks and copyrights are essential components in the protection of MEDITE’s intellectual property worldwide. As the Company manufactures and sells products globally, it has designed its intellectual property strategy to provide the necessary protection while containing and managing the associated costs. Two of the major components of this strategy are the aggressive filing of “provisional” patent applications in the US, and of filing utility patent applications under the Patent Cooperation Treaty (PCT) or similar entry points into national patent offices worldwide.
With the passage of the America Invents Act (AIA), the patent systems in all major countries now award patents on a “first-to-file” basis that places a premium upon filing one or more patent applications as soon as it is determined that an invention meets the minimum standards for patentability. This filing is in the form of a “utility” application that meets all of the requirements for examination by a patent office. The U.S. offers the opportunity to file “provisional” patent applications that, while not being in form for examination and not providing any formal rights or protections, is accepted by almost all countries as officially establishing the “priority” or invention date for utility applications that are derived from it within one year of the date of the filing of the provisional application. Provisional applications therefore provide a means of obtaining the earliest possible priority date while allowing time to refine and expand the scope of the invention and associated claims that are included in any resulting utility application. The Company’s practice is to convert each of its provisional patent applications into some number of utility patent applications within this 12-month period. In most cases each provisional application results in one utility filing. However, in some cases a single provisional application can generate two or more separate utility applications and/or multiple provisional applications can be consolidated into a single utility application. During the examination of a utility application, the examining patent office may require the Company to divide the application into two or more separate applications or it may file a continuation-in-part patent application that expands upon the technology disclosed in an earlier patent application and which has the potential of superseding or improving upon the disclosure of the earlier application. For these reasons, estimating the number of patents that are likely to be issued based upon the number of provisional and utility applications filed is difficult.
Prior to filing a utility application in the U.S., the Company reviews the application to determine whether obtaining patent coverage for the invention outside of the U.S. is necessary or desirable to support our business model. If so, a utility patent application is filed through a Patent Cooperation Treaty (“PCT”) receiving office. This approach allows it to select the most appropriate receiving office to perform the initial patentability assessments while providing a single entry point into over 120 national patent offices worldwide. Depending upon the nature of the invention and business considerations, it typically nationalize PCT applications in some number of countries, the number depending upon anticipated market size and the locations of potential competitors.
MEDITE routinely prepares and intends to continue to prepare additional patent applications for processes and inventions arising from its research and development process. The protections provided by a patent are determined by the claims that are allowed by the patent office that is processing the application. During the patent prosecution process it is not unusual for the claims made in the initial application to be modified or deleted or for new claims to be added to the application. For this reason, it is not possible to know the exact extent of protection provided by a patent until it is issued. Recent changes in US patent law, particularly conversion to a “first to file” system and introduction of a challenge period after a patent is granted may influence our IP strategy, especially as related to the filing of provisional applications. Several recent court decisions are also expected to influence these decisions.
Patent applications filed in the U.S. prior to November 29, 2000, are maintained in secrecy until any resulting patents are issued. As there have been examples of U.S. patent applications that have remained “in prosecution” and, therefore, secret for decades, it is not possible to know with certainty that any U.S. patent that we may own, file for or have issued to us will not be pre-empted or impaired by patents filed before ours and that subsequently are issued to others. Utility patent applications filed in the U.S. after November 29, 2000, are published 18 months after the earliest applicable filing date. This revised standard reduces the chances that such a “submarine” patent will impair our intellectual property portfolio. Foreign patent applications are automatically published 18 months after filing. As the time required to prosecute a foreign utility patent application generally exceeds 18 months and the foreign patents use a “first to file” rather than a “first to invent” standard, the Company does not consider submarine patents to be a significant consideration in its patent protection outside of the U.S.
The Company’s products are or may be sold worldwide under trademarks and copyrights that it considers to be important to its business. It owns the trademarks relevant to these products and may file additional U.S. and foreign trademark and copyright applications in the future.
Future technology acquisition efforts will be focused toward those technologies that have strong patent or trade secret protection.
The Company cannot be sure that patents or trademarks issued or which may be issued in the future will provide us with any significant competitive advantages. We cannot be sure any of our patent applications will be granted or that their validity or enforceability will not be successfully challenged. The cost of any patent-related litigation could be substantial even if we were to prevail. In addition, the Company cannot be sure that someone will not independently develop similar technologies or products, duplicate our technology or design around the patented aspects of our products. The protection provided by patents depends upon a variety of factors, which may severely limit the value of the patent protection, particularly in foreign countries. We intend to protect much of our core technology as trade secrets, either because patent protection is not possible or, in management’s opinion, would be less effective than maintaining secrecy. However, the Company cannot be sure that our efforts to maintain secrecy will be successful or that third parties will not be able to develop the technology independently.
Research and Development Expenditures
The Company’s research and development efforts are focused on introducing new products as well as enhancing our existing product line. We utilize mainly in-house research and development personnel and in some cases external research and development services including collaboration with universities, medical centers and other entities. Our research and development activities are presently conducted in the U.S., Germany and Poland.
Management believes research and development is critical to our success and business strategy. Research work in the area of chemical and biological components is expected to continue for the foreseeable future as we seek to refine the current process and add additional capabilities to our analysis procedures, including the detection of other forms of cancer and precursors to cancer. We anticipate the need to invest a substantial amount of capital, including the cost of clinical trials, required to complete current developments and bring it to market.
The continuing development of new and update existing technology and consumables for histology and cytology is necessary to further increase the Company’s competitiveness and management intends to spend a certain percentage of revenue on an on-going basis. With increased revenue, the percentage attributed to research and development is anticipated to decline, even with the expenditures increasing.
Components and Raw Materials
Most of the materials used in Company products are readily available from multiple diversified sources. As these raw materials typically account for less than 10 % of the cost of the product, changes in prices for these materials will not have a significant influence on our manufacturing costs.
For paraffin the raw material is oil based and therefore the price fluctuates depending on the commodity markets. Management believes that the sales prices are adaptable, and can be adjusted for significant swings in oil prices.
Some of the staining solutions reagents are dependent on specific chemicals where the price also fluctuates. The Company typically will negotiate a fixed price with our supplier for a term of one year to limit its exposure.
The availability of electronic and electrical parts for circuit board manufacturing is another challenge the Company closely monitors. The Company has negotiated with our critical parts suppliers to provide 12 month notice before discontinuing parts and, the Company if necessary, will place a last large order for sufficient number of these parts to support the continued manufacture and support of all MEDITE products that use the part for the anticipated life of the MEDITE product. In addition it takes advantage of the extended availability programs that are offered by some manufacturers of electronic components and assemblies. The Company also attempts to transfer this discontinuation risk to our external circuit board module vendors, if possible.
Working Capital Practices
The Company is expecting future needs for additional working capital to support our growth. The increases in revenue also means an increase in inventory requirements to fulfill orders within delivery timeframes and also increased trade account receivables, typically with payment terms of between 30 to 90 days.
The current level of working capital shortfalls have been partially financed by sales of common stock and secured promissory notes offset by reductions in our credit lines with a German bank. During 2015 the Company’s bank credit lines have utilized working capital. In order to continue growing the business, the Company is planning to raise additional funds through the sale of equity securities or convertible debt, as available in the marketplace. To that objective the Company expects to consummate a $5.0 million convertible note offering, utilizing the services of an investment banker on or about April 30, 2016.
The Company believe that future growth in sales of the existing and future products and cost controls will contribute to improved operational cash flows to partially finance our immediate working capital needs.
Employees
As of December 31st, 2015, the Company employed a total of 80 employees including 7 trainees and 4 part time employees which represents 74 full-time-equivalent. None of our employees are members of a labor union.
Financial Information about Foreign and Domestic Operations and Export Sales
Markets outside of North America are an important factor in the Company’s business strategy. Any business that operates on a worldwide basis and conducts its business in one or more local currencies is subject to the risk of fluctuations in the value of those currencies against the dollar, as well as foreign economic conditions. Such businesses are also subject to changing political climates, differences in culture and the local practices of doing business, as well as North American and foreign government actions such as export and import rules, tariffs, duties, embargoes and trade sanctions. The Company does not regard these risks, however, as a significant deterrent to our strategy to introduce our MEDITE product lines to foreign markets in the future. The Company’s current operations include payments and receivables in the three currencies of USD, EURO and Yen. For USD and Euro we try to naturally hedge them by having revenues and expenses in both currencies. Even in not handling other currencies directly, the exchange rates in both USD and Euro may influence our costs and prices directly and/or indirectly. The Company intends to adopt strategies to minimize the risks of changing economic and political conditions within the foreign countries we intend to do business.
During the fiscal year ended December 31, 2015, the Company had direct foreign operations in Germany, Poland and Austria and distributed to approximately 70 countries in total.